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What is the Estate Tax? Do you have a Taxable Estate?

The estate tax, sometimes referred to as the death tax, is a tax imposed upon the value of assets within a decedent’s estate. There is both a federal and Massachusetts estate tax. There are both similarities and differences between the two types of taxes.

The estate tax is imposed upon the value of the assets in a decedent’s estate after certain credits, deductions, and exemptions are taken into account. Beginning in 2018 the federal estate tax is imposed upon an individual’s estate if the assets within the estate are valued at $11.2 million or higher. Prior to 2018 the threshold for the federal estate tax was approximately $5.4 million. The Massachusetts estate tax is imposed when an estate consists of assets valued at $1 million or higher.

Assets within the estate are valued utilizing the date of death value of the asset. Clearly, the Massachusetts estate tax is likely to impact a wider range of individuals and families compared to the now increased federal threshold. For a married couple, any federal exemption not utilized by the first spouse to die, can be rolled over for use by the surviving spouse. Thus, for a married couple, and with proper planning, the couple would not pay a federal estate tax if the assets within the surviving spouse’s estate are valued below $22.4 million.

There are several deductions and credits that are applied against the value of the estate prior to imposing any tax. The two most utilized deductions are the unlimited marital deduction and the charitable deduction. The unlimited marital deduction is the most widely utilized deduction by couples. The first spouse to die can leave the surviving spouse assets owned by the decedent at the time of death, and the decedent’s estate value will be reduced by the value of the assets that pass to the surviving spouse. There is no limit upon the amount of assets you can leave to your surviving spouse; the marital deduction is unlimited in nature.

Many couples with smaller estates will have simple wills that provide that assets pass to the surviving spouse upon death. For estates that are not affected by the federal or estate tax thresholds such an easy estate plan works well. However, for couples that may be subject to the estate tax, correct estate planning can minimize or ultimately eliminate potential estate tax exposure. Planning methods such as portability of unused exemption amounts, Qualified Terminal Interest Property (QTIP) trusts, and lifetime gifting can be utilized in a manner to the benefit of the couple looking to minimize estate tax exposure.

Contact an attorney at Lake Shore Legal concerning assistance in setting up an estate plan based upon your specific circumstances.  Our attorneys can provide you with different options available so that the disposition of your estate can occur according to your wishes while also aiming to reduce any estate tax exposure.

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